Interest rates are rising, but that doesn't necessarily mean you should immediately move your money into higher-yielding options like CDs, high-yield savings accounts or Treasury bonds.
While the yields on these accounts are the highest in over a decade, rushing into longer-term commitments just to chase rates could be risky. There are a few reasons to proceed with caution:
Interest rates may rise even further
If the Federal Reserve continues aggressive rate hikes next year to combat high inflation, yields on deposit accounts and bonds could increase even more. By locking your money into a long-term CD now, you risk missing out on better rates in the coming months.
It may be better to keep funds in a regular savings account where you can access them at any time.
The economy could slow sharply
Some economists worry that higher interest rates will significantly slow economic growth, possibly even causing a recession. In that scenario, the Fed would likely cut rates to stimulate the economy.
If you put money into long-term CDs now, you won't be able to take advantage of those lower rates without paying penalties to withdraw early. It's safer to maintain flexibility.
Inflation may stay elevated
While higher rates are meant to counter rising prices, inflation could continue outpacing the yields on many deposit accounts. The real value of your money might decline over time, even in higher-yielding options.
Again, liquid savings accounts allow you to respond quickly if inflation accelerates further.
Of course, by keeping too much money in low-yielding savings accounts, you risk losing out to higher interest rates over the long run. But when there is economic uncertainty and rates are in flux, it's best not to chase yields or lock into longer-term commitments.
A balanced approach is the prudent choice. Move some money to take advantage of higher rates today, but keep enough in liquid savings so you can shift strategies quickly if needed. Stay informed and be ready to act, but don't rush into riskier options just for a few extra basis points of yield.
Patience and flexibility are key in times like these.
